Netflix’s Troubles Are a Self-Made PR Disaster

| Ted Landau's User Friendly View

It would be easy to ridicule Netflix at this point. In fact, I already have — on Twitter — where I compared Netflix’s CEO to Chandler on Friends, digging a deeper hole each time he tries to “explain” himself out of an awkward situation. It’s been disheartening to watch what had been one of my favorite services and most admired corporations slowly sink below water. There’s now a real danger that the Netflix ship may be unable to recover. And yet…I also understand that Netflix is facing a difficult dilemma with no clear sure-fire solutions.

Netflix logo

The first shoe

Last July, Netflix sent an email to all of its customers, announcing that it was splitting its DVD and unlimited streaming services into two separate plans “to better reflect the costs of each…(thereby giving) our members a choice.” [A longer version of the email message was posted to Netflix’s blog.] 

The announcement was a public relations disaster — with good reason. Worded to sound as if Netflix was giving its customers some new advantage, the change actually amounted to a huge price increase. If you currently subscribed to the one-DVD-at-a-time plan, your rate for the exact same service would almost double. Rather than spell out these implications, explain why they were necessary, and offer empathy for the likely negative reaction from their customers — Netflix simply said, in effect, “like it or leave it.” Many customers began to choose the latter option.

I remained on the fence. I don’t like a price increase any more than the next guy, but I still liked what Netflix provided — and was willing to pay more to get it. Until now…

The other shoe drops

Over the past weekend, Netflix again sent out an email to all of its customers. This one was personally signed by CEO Reed Hastings. [Again, a longer version of the email is available on the Netflix blog.]

In it, referring to the prior announcement, Mr. Hastings admits:

“I messed up. I owe everyone an explanation. Many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology. In hindsight, I slid into arrogance based upon past success.”

The price increases stand unchanged. It’s just that Mr. Hastings is now sorry about how they were announced.

Personally, I found this to be too little, too late — and likely insincere. Actually, I see no excuse for the first message ever being sent. I don’t send a “sensitive” email to a close friend without re-reading it numerous times and letting it sit for a day or two. I’ll also have my wife check it over to get her reaction. Only after it is thoroughly “vetted,” will I send the message.

Mr. Hastings was sending an email to millions of subscribers and has an entire paid staff to offer advice. How could they not foresee the reaction that would result? How could they have ever approved the email? That the email was sent means that the process is so screwed up that either Mr. Hastings should resign as incompetent or he should fire whoever was responsible for the debacle (maybe this has already happened; I don’t know).

But, with Netflix’s latest missive, Mr. Hastings had more than just an apology on his agenda. The email went on to explain how Netflix would soon be completely separating their DVD and streaming services. The new name for the DVD service will be Qwikster. The streaming service will retain the Netflix moniker. On the plus side, this will supposedly allow each service to focus on its particular needs, so as to grow and improve independently. However, the split comes with numerous minuses, as even Mr. Hastings admits: 

“A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn’t show up on Netflix, and vice-versa.”

It’s even worse than that. Currently, my DVD queue shows if a listed movie is also available for streaming. I have used this feature on numerous occasions to save myself from selecting a DVD that I could watch over streaming instead. Similarly, when I search for a movie, the results shows me the availability for both Instant and DVD at the same time. All of this will be gone after the split.

The worst part of this — from a business perspective — is that the “unbundling” eliminates most of the incentives for a customer to stick with Qwikster. Until now, if I gave up on Netflix DVD rentals, I would also lose all of the just-cited advantages of a linkage between Netflix’s DVD and streaming services. With that linkage gone, Qwikster is now on its own to compete with everything from Redbox to iTunes rentals. As my frequency of DVD viewing declines, the advantages of Qwikster fade even more.

As a result, I will be canceling my Qwikster DVD subscription, a casualty of the changes at Netflix.

What about the Netflix streaming service? I plan to keep it for now. It’s convenient — especially with its queue accessible from almost every television and television peripheral that you can buy today — as well as from Macs and iPads. But the recent announcement of the impending disappearance of Starz from Netflix is incredibly bad timing. Just as Netflix seeks to have its streaming service survive on its own, the customer value of the service significantly declines. Netflix has bet the farm on the growth of its streaming business. Unless Netflix can deliver a strong library of streamed movies, the company may lose that bet.

And yet…

With its price increase announcement, Netflix precipitated a self-made public relations disaster. It then compounded the mess by announcing a company split that succeeds in making its services less convenient and less competitive. Not good.

And yet…Netflix had to do something like this. Standing still was not an option. Here’s why:

DVDs are dead. Yes, I am exaggerating — but only in the short run. While DVDs (and Blu-ray discs) are still with us, their prevalence is on the decline. Just as DVDs eventually eradicated VHS tapes, online delivery of video will eventually replace optical discs. DVDs may still hang around (along with CDs) — but with a much diminished market share. Apple already knows this: Rather than add Blu-ray drives to their machines, they eliminated optical drives altogether — and instead doubled down on iCloud. I believe Apple’s assessment is on target here.

As a result, Netflix cannot afford to have a business model that depends primarily on DVD mailings. Netflix correctly sees its streaming business as its future. Separating streaming from DVD subscriptions is just the first step. Ultimately, Qwikster will close up shop — which may be why Netflix is not too concerned about the negative consequences of the Netflix-Qwikster split. When the time arrives for Qwikster to fade away, Netflix will be better off with streaming as a separate entity. Keeping its streaming business intertwined with its DVD business risks wrecking both businesses. 

Netflix also needed to start charging for streaming movies. Unlimited streaming began as a free bonus. If you paid for the Netflix DVD service, you got streaming thrown in at no added cost. This is not sustainable — especially as the streaming library grows and the service becomes more popular.

As a fantasy exercise, imagine that a day comes when every movie is available via streaming. In such a world, a DVD subscription makes no sense. Although I could concoct a few situations where DVDs might still be preferable, they would be too rare for the business to survive. If Netflix was still giving away streaming at this point, the company would soon cease to exist. This fantasy scenario will be reality some day. To avoid disaster, the free ride for streaming had to end. 

So yes, changes are necessary for Netflix. But it’s all in the timing and the manner in which the changes are made. Netflix has to handle the short term transition well enough for the company to survive to reap the long term benefits. So far, things have not been going well. Case in point: the company’s stock has lost around 2/3 of its value since peaking a few months ago.

I believe things would have gone better if Netflix had started with a smaller price increase, charging say only $3.99/month for streaming (at least for those also maintaining the DVD service). Over time, as the streaming library grows and the service becomes more entrenched, a second increase could be announced. What they did instead was too much too soon. Together with how they handled the announcement, it mainly served to alienate customers rather than bring them on board.

Second, while a split into Netflix and Qwikster makes sense, I would not have been so quick to completely isolate their user interfaces. Netflix should provide an optional means of integrating features such as user ratings and film availability. There needs to be a greater incentive to stay with both services. As it stands now, I see huge defections from Qwikster coming — defections that could have been avoided.

But that’s just me doing some armchair quarterbacking.

Even if I’m wrong in my advice, even if Netflix handled everything in the best possible way, their future would be on shaky ground. Such is the way the future can quickly discard outmoded or lagging technology businesses. Netflix has not handled things in the best possible way. Whether or not they can survive their recent missteps remains to be seen.

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14 Comments Leave Your Own

skipaq

Ditto. DVD rentals being canceled the end of this month.

Tom

I think you are right on the mark here.  I also believe splitting up the two units is a preemptive strike.  They know eventually the DVD business will have to be killed off, and they don’t what that event to be associated directly with the Netflix brand.

Regarding the pricing change, I completely understand the need to put a formal pricing structure around the streaming service.  This type of service has massive IT infrastructure costs that will increase with additional customers.  As a result they need revenue that is directly tied to the underlying cost drivers in order to have a chance of having a decent profit margin per customer.

I’m currently retaining both subscriptions, but the DVD one is on a short leash.  Similarly, if the content for streaming gets worse and not better…I’ll be dumping that service as well.

graxspoo

I agree with all your points Ted. One other aspect that isn’t getting much airtime though is the real reason that Netflix had to make a complete break between streaming and DVD business, and that’s licensing. My guess is that Netflix was having a hard time getting rights to stream new releases as long as it was also mailing DVDs. It’s clear that it wanted and needed to improve its streaming offering, but without divorcing itself completely from the DVD business it was probably unable to do so because of the strange licensing rules the industry follows. Simultaneously they didn’t want to badmouth the studios, since without their goodwill Netflix is dead. So, this explains the rather drastic and poorly explained decisions. Doesn’t mean I’m happy about it.

DocRoss

My wife & I rarely watch broadcast TV, and have turned to streaming Netflix for 85% of our TV watching. Much of that has been TV shows that we missed at some point, but the variety of TV that’s available for streaming is quite lame and seems to be shrinking rather than growing. Where are the HBO series? TNT?

We stream something just about every day, but we feel like we’re running out of content. So we keep the DVD service as a back-up for those things that we can’t stream. So they’ve got us right where they want us, except unless the streaming service gets more and better content, we’ll drop that. And if we do, we’re likely to drop the DVD service too and just go with iTunes.

jfbiii

Netflix streaming isn’t sustainable at any price. It’s too dependent on other people to ever be completely settled. Studios will always be able to undercut your price for content or to try and pull a stunt like the music industry did and cut sweetheart drm-free licensing deals with Amazon in an effort to undermine the growth of iTunes and Apple.

The DVD/Blueray physical business is going to be around for decades. Fiber won’t be ubiquitous in rural America for at least that long and even after it is, chances are good that everyone will be at the mercy of the bandwidth pirates imposing an unreasonable marginal cost per bit on service.

Ted Landau

Studios will always be able to undercut your price for content or to try and pull a stunt

Netflix’s missteps pale in the face of the movie industry’s idiotic policies. Ultimately, I am betting (hoping?) that they will lose enough control and clout over time that they cannot stop the streaming train’s progress. We’ll see.

archimedes

Ted, you might want to check out this interesting article I read on TMO the other day:

http://www.macobserver.com/tmo/article/how_netflix_lost_its_glamor_and_its_way/

Ted Landau

you might want to check out this interesting article

I did read it, of course. smile

As sometimes happens, John and I both decided to offer our somewhat different takes on a big story of the week.

Antarius

Fox Business ran an article yesterday saying that the reasoning behind shedding its DVD side of the business is so that the streaming side of the business will be enticing for someone like Amazon to buy out. Amazon won’t pay have to pay state taxes, like they would if they had the dvd side of the business. This would get Netflix out of the predicament they ran themselves into, being a large portion of their customer base has told them to get lost.

http://www.forbes.com/sites/ericsavitz/2011/09/22/netflix-to-sell-streaming-biz-to-amazon-analyst-theorizes/

jfbiii

That, of course, makes as much sense as someone wanting to buy Hulu. There’s no need to buy a streaming service, much less if you already own one. You gain a customer base, sure, but you’re going to overpay for them.

wab95

Netflix has bet the farm on the growth of its streaming business. Unless Netflix can deliver a strong library of streamed movies, the company may lose that bet.


Ted:

I think this is the heart of the matter. As I mentioned on John’s post, being a relative newcomer to Netflix (I joined mere months before purchasing an ATV2 and an HDTV home theatre system), and only ever using their streaming service, I admit I lack the visceral angst many express about their service breakup.

That said, if I were the newly appointed CEO of Netflix, and these two services still had their original configuration, my first order of business would be to put the DVD business on a short path to retirement. I would provide a grace period for people to get used to the idea that this was going away, but would explain to them that this is not the future of this industry, nor of how content is likely to be accessed by the majority over time.

My next order of business would be to enhance the user experience to the extent possible, beginning with what you’ve just highlighted - expanding that library, as well as the supportive services that make it accessible. Staying with enhanced user experience, ideas that come to mind reflect how I have used DVDs - I have a library. Most people have had. I could foresee allowing clients to create organised libraries, with a guaranteed duration of access of content in a user’s library. Costs permitting, we might do something similar to what Apple are doing with music; namely, if a client has a DVD in their library (a downloadable app could help with that), provide a guarantee that we will keep that item in their library for as long as they maintain their account with us. Some of these might require a tiered membership fee, but so be it. These are ideas off the top of my head; obviously a CEO would want to do some research to see how people (in and out of the client base) are accessing content.

The point is, Netflix are staking their future on this move, and need to shore up a loyal and substantial base. To do that, they should take a page from Apple, and make it not about the movies (expanded libraries are nice, but not enough); make it about the consumer experience. Given that their growth has stagnated, and given that they are losing customers due to the DVD debacle, they need to restart growth. In my view, to do that, they need to figure out, and quickly, what they can provide to enhance consumer experience in a way their competition have not.

mlanger

Ted: As usual, I think you’re right on target about everything—except one thing: DVDs do still fill a need for many people who cannot get reliable, high speed broadband service, such as the millions of people who live in rural America.

I happen to be one of these people. The fastest bandwidth I can get in my home-based office is 1 Mbps. That’s barely fast enough to watch YouTube. And sadly, with this country’s inability to maintain and improve communications infrastructure beyond major metropolitan areas, this situation is unlikely to change.

But maybe it’s all for the better. Who really needs to watch all that video crap anyway?

shacktoms

Didn’t Netflix start as a DVD service, and add the streaming feature later on?

If Qwikster is an independent company, seeking profits and customers on its own, then why wouldn’t they develop a streaming service, as Netflix did?

If they cannot do this, then they are not an independent company, and shouldn’t be treated as such.

Perhaps we would need to wait until Qwikster is sold by Netflix, but when that happens, I suspect that it will become a component of a full-service alternative to Netflix.

If Amazon bought Qwikster, for example, it could have a single platform for viewing (paid and free), the Qwikster DVD by mail service, and their DVD sales. They might also be able to expand Qwikster into a more general lending library service.

~Kezo~

Ironic that no one has even mentioned the fact that netflix has a truly dismal choice of 1-3 star movies as well, with only stars and foreign films that usually carries ratings above 3..

I for one will be unsubscribing soon enough, (count me as # 800K+1) as I can easily watch the ENTIRE seasons of my favorite tv shows rather than 3/4 of them, unlike several websites that I have bookmarked already. (Those Idiots got rid of Dexter!)

If netfix had a decent library of movies for streaming then I could see the logic of getting rid of DVDs, but as it stands, were they to rely elusively on streaming, (Especially WITHOUT Stars, their largest content provider for streaming!) they will eventually tank as a company.

Considering their brutal disregard of their employees (Check out “glassdoor.com) and utter contempt for their customer base, I say good riddance! (Unfortunate for the employees though.) We still have Amazon, Hulu, and plenty others will be there to pick up the slack!

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